What is the average student debt?
The average student debt is $35,200 for the class of 2013 according to a Fidelity survey. Most student debt comes from private and state loans, while about 30% comes from credit card and personal loans.
What debt to pay first
Beyond required monthly payments, paying down debt should be a priority. To make sure debt is being paid down in the most cost effective way, pay down the debt with the highest interest rate first.
This will likely mean paying down credit card debt first, then private loans, and finally unsubsidized and subsidized loans.
How to make money and pay down debt
Most graduates will use income from their first job to pay down student debt. But many graduates may also have savings from previous jobs. It makes sense in most cases to pay down high interest rate debt with savings, assuming your savings are not invested or tied up in an IRA.
Be careful not to use all of your savings to pay down debt. Make sure you have enough savings to be comfortable financially. Think about how much you would need to survive if you lost your job. Create an emergency fund. Many advisers recommend having 3-6 months worth of household expenses in an emergency fund. Of course, the amount you need to save in your emergency fund is based on your personal expenses and spending habits. Your emergency fund needs also depend on how employable you are – how long would it take you to get another job with similar pay? Are your skills relevant in multiple industries?
How to invest: make your money work for you
Once you’ve paid down your debt, you can use your residual income to invest and make your money work for you. To learn how to invest, you can read these investment books and follow our blog. Try to get to this point of residual income investing as soon as possible. When you get there, you won’t have to sell your Charzards or eat ramen anymore.